Lesson 10: Types of Real Estate Contracts. Types of Real Estate Contracts. Real Estate Principles of Georgia. Listing Agreement

Transcription

1 Real Estate Principles of Georgia 1 of 66 Lesson 10: Types of Real Estate Contracts 225 Types of Real Estate Contracts Five types of real estate contracts: listing agreements buyer agency agreements purchase agreements land contracts option agreements 226 Listing Agreement Listing agreement: Written employment contract between seller and broker (not salesperson). Typically, seller agrees to compensate broker for services by commission. Commission amount is usually a percentage of property s sale price

2 Earning a Commission Three requirements Broker is legally entitled to collect a commission only if: 1. parties had written agreement, 2. broker was licensed at time she performed brokerage services for seller, and 3. broker met employment agreement terms. 226 Earning a Commission Ready, willing, and able buyer Ready, willing, and able buyer: party who offers to buy property at price and on listing agreement s terms, and who is financially able to complete purchase. If offer meets seller s terms but seller doesn t accept it (or if offer doesn t meet terms but seller accepts it anyway), seller usually liable for commission. 227 Summary Earning a Commission Listing agreement Commission Ready, willing, and able buyer 2

3 Types of Listing Agreements Payment of broker s commission depends on type of listing agreement used: 1. open listing 2. exclusive agency listing 3. exclusive right to sell listing 4. net listing 228 Types of Listing Agreements Open listing Open listing: Listing given to as many brokers as owner chooses (also called non-exclusive listing). Broker earns commission only if she is procuring cause: primarily responsible for bringing about sale. Open listings generally used only if seller insists. 228 Types of Listing Agreements Exclusive agency listing Exclusive agency listing: Seller signs listing agreement with only one broker. If seller finds buyer, no commission owed. If broker or anyone other than seller finds buyer, broker is entitled to commission

4 Types of Listing Agreements Exclusive right to sell listing Exclusive right to sell listing: Seller lists property with only one broker, who is entitled to commission if property sells during listing period no matter who finds buyer. Even if seller finds buyer without any help, listing broker still gets commission. Exclusive right to sell listing is the type of listing most frequently used. 228 Open vs. Exclusive Listings Due diligence Open listing usually unilateral contract: seller agrees to pay commission if broker finds buyer, but broker doesn t promise to try to find a buyer. Exclusive listing usually bilateral contract: seller promises to pay a commission, and broker promises due diligence and good faith effort to sell property. 229 Summary Types of Listing Agreements Open listing Exclusive agency listing Exclusive right to sell listing 4

5 Elements of a Listing Agreement Listing agreement should: identify the property set terms of sale grant broker authority determine broker s compensation 229 Elements of a Listing Agreement Property description Listing agreement must identify property. Attach legal description of property to listing agreement as exhibit (to avoid typos/errors, photocopy description from seller s deed). Legal description not essential for valid listing agreement in Georgia; only an adequate description required. 230 Elements of a Listing Agreement Terms of sale Include terms of sale acceptable to seller (listing price, etc.). Seller need not accept offer on these terms, but will likely be liable for commission if seller turns down offer

6 Elements of a Listing Agreement Broker s authority Listing agreement generally authorizes only to find a buyer for property. Not to accept offers or transfer title. 230 Elements of a Listing Agreement Termination date Termination date: When broker s authority to act on seller s behalf ends. Georgia requires exclusive listing agreements to specify a termination date. 230 Elements of a Listing Agreement Commission provisions Forms have space to write in broker s commission rate/amount. Commission must be negotiable. Pre-printed rate = Violation of antitrust laws 231 6

7 Elements of a Listing Agreement Commission provisions Net listing: Agreement specifying net amount seller will accept from sale. Any excess proceeds no matter how much will belong to broker. Can be abused by dishonest brokers. Illegal in Georgia. 231 Commission Provisions Payment Usually by check, but sometimes: new promissory note, assignment of existing note, or assignment of funds from buyer to seller. other items of value 232 Commission Provisions Safety clause Safety clause: Entitles broker to commission if seller sells property during safety period (such as six months) after listing expires. Included in most exclusive listings. Also called protection period clause. Prevents seller from avoiding commission by waiting for listing to expire before accepting offer

8 Commission Provisions Safety clause Safety clause may require broker to give seller a list of prospective buyers that broker had contact with during listing period. George Rrumpkin Surly Burlu Knight Knightly Humpty Dumpty Rufus Woofley 232 Summary Elements of a Listing Agreement Property description Broker s authority Commission rate Net listing Safety clause Termination date Buyer Agency Agreement Contract between broker and prospective buyer. Analogous to listing agreement, although it doesn t relate to a particular property

9 Buyer Agency Agreement Typical provisions include: duration of agency, characteristics of desired property, price range, conditions under which a fee will be earned, who will pay the fee, and description of broker s duties. 233 Buyer Agency Agreement A buyer s agent may be compensated through: a retainer, a seller-paid fee, and/or a buyer-paid fee. 238 Purchase Agreement Sales contract between buyer and seller: also called deposit receipt, earnest money agreement, or contract of purchase. Buyer (offeror) makes offer to purchase. Seller (offeree) has power to accept and form a legally binding contract

10 Forming the Contract Written offer Writing requirement: Buyer must present written, signed offer to seller. Statute of frauds requires agreement to buy and sell real property to be in writing. 239 Forming the Contract Earnest money deposit The earnest money deposit (or good faith deposit) is submitted with written offer to show intent to complete purchase. Form buyer used to make offer serves as buyer s receipt. 239 Forming the Contract Seller s acceptance Seller accepts offer by signing it. Binding agreement has been created when buyer/offeror receives notification of seller s acceptance

11 Forming the Contract Functions of form Contract form serves three functions: 1. buyer s offer to seller 2. buyer s receipt for deposit 3. when signed by seller and returned to buyer it becomes binding contract 239 Elements of Purchase Agreement Parties and signatures Under statute of frauds, agreement unenforceable unless signed by all parties. If transaction involves more than one buyer and one seller, real estate agent is responsible for having all parties sign. 239 Parties and signatures Capacity Contract may be void if: either party is a minor (under 18) either party is mentally incompetent Contract

12 Parties and signatures Married parties If party is married, spouse may need to sign purchase agreement for it to be enforceable. 240 Elements of Purchase Agreement Property description If property description is ambiguous, contract may not be enforceable. Complete legal description is always recommended. If description won t fit in space provided, use attachment and write See attached legal description on form. 240 Elements of Purchase Agreement Terms of sale Total purchase price Downpayment Buyer s financing arrangements: loan amount and type interest rate discount points loan term amortization monthly payment

13 Elements of Purchase Agreement Earnest money deposit Buyer will normally make an earnest money deposit (or good faith deposit) to show that he is serious about completing the transaction. Amount of deposit varies according to local custom, but deposit is not required for valid contract. 240 Earnest Money Deposit Form of deposit Should state deposit s form cash, check, or promissory note. Agreement should state when/how deposit will be refunded to buyer or forfeited to seller. 240 Earnest Money Deposit Liquidated damages The agreement will typically treat the deposit as liquidated damages. Agreement should specify how deposit is split between seller and broker if buyer defaults

14 Elements of Purchase Agreement Transfer of possession Typically occurs on closing date. If transfer takes place before or after closing, arrangements should be included in agreement. Parties should also execute separate rental agreement. 241 Elements of Purchase Agreement Closing provisions Parties should appoint a closing attorney or other closing agent in the agreement. The agreement should also state how parties will divide closing costs, including closing attorney s fees. 241 Elements of Purchase Agreement Conveyance and title Agreement should specify type of deed seller will use to convey title. Contract also typically states: there are no liens or other undisclosed encumbrances against the property buyer may withdraw without penalty if new survey differs from survey attached to deed

15 Elements of Purchase Agreement Conditions of sale Purchase agreement usually includes one or more contingency clauses: provisions making sale depend on fulfillment of specified conditions. If conditions are not fulfilled, agreement will terminate without liability. 241 Elements of Purchase Agreement Conditions of sale Most residential contracts contain financing contingency contract contingent on buyer s ability to obtain financing. Also common: 1. agreement contingent upon receiving satisfactory inspection results 2. agreement contingent upon sale of the buyer s current home 242 Elements of Purchase Agreement Conditions of sale Contingency clause must cover: What must occur to fulfill condition? What is time limit for fulfillment of condition? How should one party notify other when condition is fulfilled? Can either party waive condition? What are parties rights if condition isn t fulfilled or waived?

16 Elements of Purchase Agreement Agency Disclosures Each licensee must disclose: Which party each is representing If Dual agency or Designated agency applies The source of agent s compensation Whether any material relationships exist 242 Elements of Purchase Agreement Broker Compensation If purchase agreement contains no provision for broker compensation, a separate broker confirmation agreement may be used. Property Disclosures Typically included in purchase agreement but not a requirement in Georgia. 242 Conditions of Sale Good faith effort Parties must make good faith effort to fulfill contingencies. Can t get out of contract by failing to take steps to ensure contingencies are met on time

17 Elements of Purchase Agreement Time is of the essence clause The time is of the essence clause states that deadlines are important part of contract and will be strictly enforced. Failure to perform by agreed date is material breach of contract. 242 Purchase Agreement Amendment of agreement Once agreement is signed, contract can be modified only by written amendment (also called a rider). Amendment must be signed by all parties who signed original agreement. 243 Summary Elements of Purchase Agreement Property description Contingency clauses Time is of the essence Receipt for deposit Liquidated damages 17

18 Types of Real Estate Contracts Land Contract Land contract: Financing agreement in which buyer agrees to pay seller purchase price in installments over time. Installment sales contract, or contract for deed. 244 Types of Real Estate Contracts Land Contract Seller = Vendor Buyer = Vendee Vendee agrees to make regular payments of principal and interest to vendor over a set period. Vendee takes immediate possession of property. 244 Land Contracts Equitable title and legal title Vendee takes possession immediately but holds only equitable title to property. Vendor keeps legal title until contract price is fully paid. Vendor Vendee Legal Title Equitable Title

19 Land Contracts Vendee s rights and duties Recording: Vendee generally has right to record contract. Taxes and insurance: Vendee responsible for keeping property insured and paying taxes. Encumbrances: Vendee may encumber property. 244 Land Contracts Vendee s rights and duties Sale of property: Vendee may sell interest by assigning right to receive deed when contract price paid off. Receipt of payments: Vendor has right to receive payments. If vendee defaults, vendor can terminate contract. 245 Land Contracts Termination on default If vendee defaults, vendor can terminate land contract by giving notice of termination. Depending on state law, vendor may or may not need to initiate foreclosure action. Vendor may be required to reimburse vendee the amount paid so far

20 Summary Land Contracts Land contract Legal and equitable title Termination of land contract Option Agreement An option is a unilateral contract giving one party the right to do something, without obligating him to do it: a contract to keep contract offer open. 245 Option Agreements Option to purchase Gives optionee right to buy property belonging to optionor at certain price during specified period. If optionee decides to buy property, she must give written notice of acceptance. Option expires automatically at end of period

21 Option Agreements Requirements for valid option Writing requirement: Option agreement for real property must be in writing and state all of the terms of the sale including: Sales Price Expiration date for the option right Consideration paid for the option right Consideration: May be nominal amount such as $1, sometimes referred to as option money. Essential element to create contract. Oral option agreement is unenforceable. 246 Option Agreements Option rights Option gives optionee a contract right. Does NOT create interest in real property. Is not a lien. Can t be used as security for mortgage or deed of trust. 246 Option Agreements Option rights Optionee can assign rights in option (absent provision to contrary). Option binding on heirs and assignees of optionor

22 Option Agreements Recording If option is recorded and then exercised, optionee s interest in property will relate back to recording date. Until option is exercised, it is only contract right and not an interest in property. If option not exercised, it will remain on record as cloud on optionor s title. Recording Date 246 Option Agreements Right of first refusal Don t confuse right of first refusal with option. Right of first refusal: gives someone first opportunity to purchase property if it becomes available. 246 Summary Option Agreements Option Option rights Right of first refusal 22